Archive for September2012

Off Limits for Bond Indexers

By BRENDAN CONWAY

Flows in and out of bond-index ETFs can distort prices as the underlying bonds swing higher and lower. ETFs like AdvisorShares Peritus High Yield avoid the "ETF bid" by buying bonds outside the indexes' purviews.

. . . The rise of index investing is also creating opportunities in active management. The managers of the AdvisorShares Peritus High Yield ETF (HYLD), the only actively managed junk-bond ETF, have beaten both the iShares fund and the SPDR Barclays Capital High Yield Bond ETF (JNK) by about two full percentage points this year; they've returned 12.5%, 10.4%, and 10.6%, respectively. Manager Tim Gramatovitch stresses the hunt for value in bonds that index trackers are prohibited from owning. The SPDR fund can buy only a little more than a quarter of the available bond universe because it's barred from owning bonds from tranches below $600 million, he notes.

Gramatovitch recently warned clients that the passive funds "have no ability to deal with risks in the current credit market," on account of what he views as likely defaults, restructurings, or losses on called bonds. If the active strategy's outperformance in a "risk on" market seems surprising, it's at least partly explained by HYLD's superior 8.3% 12-month yield. If it keeps up, you'll know that the hunt for value outside indexes is real. The active strategy isn't without its trade-offs: The fund charges a mutual-fund-like 1.36% expense ratio.